A court-appointed “conservatorship” will be required for any asset owner who becomes legally incapacitated having neither a (Financial) Durable Power of Attorney Over Assets (DPAOA) nor a funded Revocable Living Trust (RLT) in place. A conservatorship proceeding is a process where a court must supervise a court-approved agent to manage and administer an incapacitated person’s assets who had not made prior arrangements (i.e., setting up a DPAOA or RLT) to address the potential condition.
When incapacitation occurs to an unprepared asset owner, his loved ones will be forced to petition the probate court to have him “adjudicated” as being legally incapacitated, and then get appointed as conservator(s) over the estate. At that point, the asset owner effectively becomes a “ward of the state” thus forcing the state to assume responsibility for “conserving” the incapacitated person’s assets, which includes vetting and approving of an appointed agent (a conservator) to handle the asset owner’s personal financial affairs under the supervision of the court. And, because conservatorship is a probate court proceeding, it becomes a matter of public record.
DPAOAs are Limited. A properly drafted DPAOA document can generally help avoid the conservatorship process when that condition arises. However, DPAOAs do not have a statutory history to rely upon and are not contractual agreements (as RLTs) and therefore have only limited usefulness. Also, DPAOAs can be controlled or even terminated by any court-appointed conservator. One of the reasons for the limitation is that a DPAOA agent never “takes title under contract” to the property he is appointed to administer. The DPAOA document is essentially deemed only as a statutory request or a sworn statement of wishes, much like a common will.
Since a DPAOA is not recognized as a contract, it cannot be administered under or regulated by the safe-harbor fiduciary terms that are imposed upon a trustee of a trust and the common law terms inherent with trusts. Many banks, title companies, insurance companies, and various transfer agents may be reluctant to process financial transactions with a DPAOA agent alone. Regulations governing the degree to which a DPAOA agent may transact business on behalf of the principal can vary from state to state. In contrast, laws governing trusts are much more uniform and well established. (Nevada statutory code is recognized by many as supreme in the arena of trust law.)
It should also be noted that an appointed DPAOA agent cannot transact with any assets held in a trust on behalf of the grantor of the trust. This is because trust assets cannot come under the legal control of the DPAOA agent since those assets would be the responsibility of the trustee. From a legal standpoint, the best that a DPAOA agent can do is to use the principal’s assets for the benefit of the principal only to the extent that such assets are held in the principal’s name. When an asset is held in a trust, only the trustee has legal authority to enter into any financial transaction(s) concerning that asset, to the exclusion of the principal’s appointed DPAOA agent. If the DPAOA agent is also the successor trustee of the principal’s trust then, of course, the agent may use the trust assets to benefit the creator/grantor of the trust in the event of the grantor’s incapacity but only as the trustee (of the trust) and not as a DPAOA agent.
DPAOAs Terminate at Principal’s Decease. DPAOA cease to be in effect immediately upon the death of the principal who created it. This means that the assets in the name of the decedent/principal will still have to be probated if such assets were not previously titled to himself as trustee of his trust at the time of his decease – or had not been assigned to the trust prior to decease.
Best Practices for DPAOA planning. Considering what would be the proper way to offer and design DPAOA planning and documentation for clients, the path is quite clear. When implementing a Revocable Living Trust estate plan, the creator should also establish a DPAOA document and a Last Will & Testament (Pour-over Will) to work in conjunction with the RLT. When drafted properly, that means the DPAOA that serves as an ancillary document to the RLT estate plan would ALWAYS provide the DPAOA agent with the power and authority to transfer any of the principal’s (not-previously-assigned-to-the-trust) assets to the trustee of the creator/principal’s trust. That is always the case with our eStatePlan Portfolio DPAOA document. That way, the incapacitated client will always be able to have the trustee of his eStatePlan RLT administer personal assets on his behalf, as a trustee of his trust, if and when it becomes necessary to do so because of incapacitation.